The annual inflation rate in Canada has eased to its lowest level since early 2021 and fallen within the Bank of Canada’s target range, marking a milestone on a journey back to price stability that could last for another two years.
The Consumer Price Index rose 2.8 per cent in June from a year earlier, down from May’s 3.4-per-cent pace, Statistics Canada said Tuesday in a report. This was the lowest inflation rate since March, 2021, and it was below the 3-per-cent reading analysts had expected.
With this latest result, inflation has entered the Bank of Canada’s target range of 1 per cent to 3 per cent for the first time in more than two years. (The central bank aims for the midpoint – 2 per cent – of that inflation-control band.)
Over 2021 and 2022, a confluence of factors – including supply chain disruptions, robust demand and extraordinary pandemic-related fiscal stimulus – led to a global run-up in consumer prices, the likes of which hadn’t been seen in decades. This only worsened with Russia’s invasion of Ukraine.
But much has changed over the past year, after Canada’s headline inflation rate peaked at 8.1 per cent in June, 2022. Price increases have cooled to less alarming levels as supply routes have unclogged and commodity prices have fallen. On top of that, the Bank of Canada has unleashed a barrage of interest-rate increases meant to tamp down demand by increasing borrowing costs.
Even so, the fight to curb inflation isn’t over. The Bank of Canada doesn’t see it returning sustainably to the 2-per-cent target until mid-2025. And the bank’s preferred measures of core inflation, which filter out extreme price movements, have risen at annualized rates of 3.5 per cent to 4 per cent, underscoring the need for central bankers to remain vigilant in the months ahead.
Leslie Preston, senior economist at Toronto-Dominion Bank, said in a client note that the CPI report “provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.”
As in previous months, the June numbers were heavily influenced by favourable comparisons to a year ago, when Russia’s aggression in Ukraine led to a surge in commodity prices.
For instance, gasoline prices fell 21.6 per cent in June from peak levels a year earlier. Excluding gas, the annual inflation rate would have been 4 per cent, down from 4.4 per cent in May.
Groceries continue to present a challenge for many households. Those costs rose 9.1 per cent on an annual basis in June, nearly matching the 9-per-cent rate in May. Fresh fruit prices rose 10.4 per cent, in part because of a 30-per-cent spike in the cost of grapes in June alone.
Mortgage interest costs rose at an annual rate of 30 per cent in June, an increase largely attributable to the Bank of Canada’s own interest-rate hikes.
Other aspects of the CPI show waning growth or outright declines.
Consumers paid nearly 15 per cent less for cellphone services in June than they did a year earlier, because of the availability of cheaper data plans and promotional pricing.
Furniture prices have dropped by 2.6 per cent over the past year, after a lengthy stretch of double-digit percentage increases. Airfares dropped by 3.5 per cent.
Finance Minister and Deputy Prime Minister Chrystia Freeland told reporters the latest inflation numbers are a welcome development.
“It’s a real milestone that inflation has come down below 3 per cent, to 2.8 per cent,” she said on a conference call from New Delhi after a meeting with her G20 counterparts. “It is within the Bank of Canada’s target range. It has been a real struggle for Canadians and the Canadian economy to get back down to 2.8 per cent, and I am really grateful to everyone who has sort of seen the course.”
Several analysts said Tuesday that inflation could accelerate in the near term, largely because of the fading impact of lower gasoline prices.
If the Bank of Canada is correct in its prediction that inflation will linger around 3 per cent over the next year, then ease to the 2-per-cent target by the middle of 2025, the process of getting prices back under control will end up taking about six months longer than the bank had previously forecast.
“What that’s telling you is the downward momentum in inflation is waning,” Bank of Canada Governor Tiff Macklem said at a news conference last week.
The Bank of Canada has raised its trend-setting policy interest rate twice in the past two months – in June, then again last week. Both times, it cited concerns that inflation could get stuck well above 2 per cent. The two hikes ended a five-month pause to changes in the bank’s policy interest rate, which now stands at 5 per cent.
“Even as headline inflation has come down largely as we forecast, underlying inflationary pressures are proving more persistent than we expected,” Mr. Macklem said after the latest rate hike. “Higher interest rates are needed to slow the growth of demand in the economy and relieve price pressures.”
Most analysts on Bay Street expect the central bank to hold its policy rate steady at 5 per cent in the coming months, which would give it time to assess the impact of its recent moves.
“We continue to believe the Bank of Canada is willing to be more patient this fall even if there is an uptick in inflation,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a note to clients. “As time passes, more mortgages will renew at higher rates, more excess savings will be exhausted, and more pent-up demand will be satisfied.”
With a report from Bill Curry